Answer:
b. The PPP condition implies that the rupee has appreciated relative to the dollar
Explanation:
Remember, the inflation rate looks at how the prices of goods and services in a country increases over a period of time, and it's effects on the the purchasing value or power of money in the country.
As in this scenario, India had 2 percent inflation rate while United States had 2.7 which is a higher price increases not in a different period but the same one, meaning that the Purchasing power parity (PPP) condition of the rupee has appreciated relative to the dollar from 2008-2012.
Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment
Answer:
9.2%
Explanation:
expected return of the investment = potential return x chance of each return happening
Expected return of the investment:
20% chance of occurring x 30% potential return = 0.2 x 30% = 6%50% chance of occurring x 10% potential return = 0.5 x 10% = 5%30% chance of occurring x -6% potential return = 0.3 x -6% = -1.8%total expected return = 9.2%One of the problems with licensing as a method of achieving international business is that it is a much more difficult procedure to implement than the other methods.
a. True
b. False
Answer: False
Explanation:
Licensing involves a company giving another company in another country/market permission to produce its products or use its likeness. The company that gets the license will then pay the parent company specified amounts for being able to do so.
This method of international business is cheap as the company licensing will see its brand spread to other countries without actually having to worry about set-up costs in the other country which can be very high. It is therefore one of the easiest methods of expanding to international markets there is.
Activity-Based Costing: Selling and Administrative Expenses Jungle Junior Company manufactures and sells outdoor play equipment. Jungle Junior uses activity-based costing to determine the cost of the sales order processing and the customer return activity. The sales order processing activity has an activity rate of $20 per sales order, and the customer return activity has an activity rate of $100 per return. Jungle Junior sold 2,500 swing sets, which consisted of 750 orders and 80 returns.
Required:
a. Determine the total sales order processing and customer return activity cost for swing sets.
b. Determine the per-unit sales order processing and customer return activity cost for swing sets. Round your answer to the nearest cent.
Answer: 1}ToTAL Activity cost =$23,000
2a) Sales order Processing Activity per unit sale=$6.00
2b)customer return activity per unit sale=$3.20
Explanation:
a. total sales order processing and customer return activity cost for swing sets
Sales order Processing Activity =Number of orders x rate per sales order
=750 x 20 = $15,000
customer return activity = Number of returns x rate per return
= 80 x 100= $8,000
ToTAL Activity cost = Sales order Processing Activity +customer return activity= $15,000 + $8000 = $23,000
b)per-unit sales order processing and customer return activity cost for swing sets
Cost of Sale order processing = $15,000
Number of swing set sold = 2,500
Therefore Sales order Processing Activity per unit sale = Cost of Sale order processing/ Number of swing set sold = $15,000/ 2,500= $6.00
customer return activity cost = $8,000
Number of swing set sold = 2,500
Therefore customer return activity per unit sale= customer return activity cost / Number of swing set sold = $8,000/ 2,500= $3.20
ToTAL Activity cost per unit sale = Sales order Processing Activity cost per unit +customer return activity cost per unit = $6.00 + $3.20 = $9.20
What type of Decision Making Model has the goal of maximizing efficiency by picking the best alternative based on specific criteria
Answer:
Rational model.
Explanation:
Rational decision model uses logic and objectivity while trying to solve a problem. It is not subjective neither does it have to depend on intuition. It helps one to identify a problem and get a solution amongst different options. It maximizes efficiency through picking the best option amongst the rest based on a specific criteria. It is assumed that the person making this choice has enough information about the options.
The advantages of using typedef do not include:a. Making programs more portable by allowing data types to be easily changed to meet system specifications.b. Making type names shorter.c. Making programs more readable.d. Increasing the efficiency of accessing struct member variables.
Answer:
d. Increasing the efficiency of accessing struct member variables.
Explanation:
In the programming language C and C++ there is a keyword i.e typedef that function is to provide a new name. It is to be used to develop an extra name for the other data type but it does not develop a new data type
Here the advantage of using typedef is as follows
1. It allows the data types for meeting the specifications of the system
2. The name would become shorter
3. Readable program
but it does not increase the efficiency
Hence, the last option is correct
A retail operation has an average gross margin of 35%. If the average monthly sales for the store is $200,000.00, what is the cost of goods sold?
Answer:
COGS= $130,000
Explanation:
Giving the following information:
A retail operation has an average gross margin of 35%.
Sales= $200,000.00
To calculate the cost of goods sold, we need to use the following formula:
Gross margin= sales - COGS
COGS= sales - gross margin
COGS= 200,000 - (200,000*0.35)
COGS= $130,000
The manager of a crew that installs wood floors has tracked the crew's output over the past several weeks. Each worker works 40 hours per week and earns $17 per hour. The wholesale cost of lumber to the company is $5 per square foot and the company charges its customers $15 per square foot of flooring installed.
Week Crew Size Lumber Used (sq. ft.) Flooring Installed (sq. ft.)
1 4 480 420
2 3 351 325
3 2 250 238
a. Calculate labor productivity for each of the weeks.
b. Suppose that in addition to labor cost and wholesale lumber cost, the firm's overhead is 120% of its labor cost. Calculate multifactor productivity for each of the weeks shown.
Answer:
Week Crew Size Lumber Used Flooring Installed
(sq. ft.) (sq. ft.)
1 4 480 420
2 3 351 325
3 2 250 238
a)
labor productivity = total output / number of employees
week 1 ⇒ 420 / 4 = 105 sq. ft. of floors installed per worker
week 2 ⇒ 325 / 3 = 108.33 sq. ft. of floors installed per worker
week 3 ⇒ 238 / 2 = 119 sq. ft. of floors installed per worker
b)
multi-factor productivity = total output in $ / (labor + materials + overhead)
week 1 ⇒ (420 x $15) / [(4 x 40 x $17) + (480 x $5) + (4 x 40 x $17 x 1.2) = $6,300 / ($2,720 + $2,400 + $3,264) = 0.75
week 2 ⇒ (325 x $15) / [(3 x 40 x $17) + (351 x $5) + (3 x 40 x $17 x 1.2) = $4,875 / ($2,040 + $1,755 + $2,448) = 0.78
week 3 ⇒ (238 x $15) / [(2 x 40 x $17) + (250 x $5) + (2 x 40 x $17 x 1.2) = $3,570 / ($1,360 + $1,250 + $1,632) = 0.84
EHealth Corporation has $1,000 par value bonds with 4 years to maturity. The bonds pay an 8% coupon rate with semi-annual coupon interest payments. The bond's closing price is quoted at 103.75. Suppose you purchase the bond for the closing price. What is the bond's yield to maturity?
Answer:
Yield to Maturity(YTM) = 3.47%
Explanation:
The yield to maturity is the required rate of return (discount rate) that would equate the price of the bond and cash outflow expected from the bond. The yield on the bond can be determined as follows using the formula below:
YTM = C + F-P/n) ÷ 1/2 (F+P)
YTM-Yield to maturity-
C- coupon
F- Face Value
P- Current Price
DATA
Coupon = coupon rate × Nominal value = 1,000 × 8%× 1/2=40(note we divide by 2 because interest is paid semi-annually)
n= 4×2 = 8 (note there 2 half months in a year)
Face Value = 1000
YM-?, C-40, Face Value - 1,000, P-103.75/100× 1000 = 1037.5
YM = (40 + (1000-1037)/8) ÷ ( 1/2× (1000 + 1037.5 ) ) =0.0347
YM = 0.0347 × 100 = 3.47%
Yield to Maturity = 3.47%
Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be____ the YTM with a call provision.
Answer:
Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be lower than the YTM with a call provision.
Explanation:
That is the correct answer to the question asked about bond indenture.
Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 35-year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point in time as described below: Real rate of return 5 % Inflation premium 4 Risk premium 4 Total return 13 % Assume that 10 years later, due to good publicity, the risk premium is now 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity.
Answer:
remaining time to maturity 25 years, annual coupon
face value $1,000
when the bonds were issued, the market interest rate was 13%, which was identical to the coupon rate, therefore, the bonds were sold at par
now, 10 years later, the market interest rate is 12% (1% less), so the current market price is:
PV of face value = $1,000 / (1 + 12%)²⁵ = $58.82
PV of coupon payments = $130 x 7.8431 (PV annuity factor, 25 periods, 12%) = $1,019.63
bond's current market price = $58.82 + $1,019.63 = $1,078.45
Conventional wisdom says one should measure a manager's investment performance over an entire market cycle. What arguments support this contention? What arguments contradict it?
Answer:
In every form of analysis, it is always safer to take a macro or holistic view of the situation. This is true for the investment performance of a manager. One investment decision that went right does not suffice to classify an investment portfolio manager as proficient, neither is one that went south enough to tag him deficient.
The forecasting ability of managers, on the balance of probability, will vary for different cases, with a helicopter view of providing a more accurate measure of their performance.
However, if it was possible to analyse the market for volatility and adjust our forecasts it becomes unnecessary to look at and analyse all the information from a 12-month cycle before coming to terms about the performance of the manager.
Cheers!
Using the information below for Laurels Company; determine the cost of goods manufactured during the current year: Direct materials used $6,100 Direct Labor 8,100 Total Factory overhead 6,200 Beginning work in process 4,100 Ending work in process 6,200a. $19,700b. $16,900c. $18,300d. $12,800e. $14,800
Answer:
c. $18,300
Explanation:
The computation of cost of goods manufactured during the current year is shown below:-
Cost of goods manufactured during the current year = Direct material + Direct labor + Total factory overhead + Beginning Work in progress - Ending work in progress
= $6,100 + $8,100 + $6,200 + $4,100 - $6,200
= $24,500 - $6,200
= $18,300
Hence, the correct option is c. $18,300
Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,400, the accumulated depreciation is $24,200, its remaining useful life is five years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $113,800. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations: Current Operations Proposed OperationsSales $191,500 $191,500 Direct materials $65,200 $65,200 Direct labor 45,300 15,100 Power and maintenance 4,200 7,200 Taxes, insurance, etc. 1,500 5,000 Selling and administrative expenses 45,300 45,300 Total expenses $161,500 $137,800Required:Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated.
Answer:
Differential analysis for 1 year
Keep old Change Differential
machine machine amount
sales revenue 191,000 191,000 0
depreciation expense -4,840 -22,760 -17,920
per year
direct materials -65,200 -65,200 0
direct labor -45,300 -15,100 30,200
power and -4,200 -7,200 -3,000
maintenance
taxes and -1,500 -5,000 -3,500
insurance
S&A expenses -45,300 -45,300 0
total 24,660 30,440 5,780
If the new machine is purchased, profits will increase by $5,780 every year.
Differential analysis for 5 years
Keep old Change Differential
machine machine amount
sales revenue 955,000 955,000 0
depreciation expense -24,200 -113,800 -89,600
per year
direct materials -326,000 -326,000 0
direct labor -226,500 -75,500 151,000
power and -21,000 -36,000 -15,000
maintenance
taxes and -7,500 -25,000 -17,500
insurance
S&A expenses -226,500 -226,500 0
total 123,300 152,200 28,900
If the new machine is purchased, profits will increase by $28,900 for the 5 year period.
A creamery shop sells its special ice cream for $4.50 a quart. It costs them $3.00 a quart to make it. The daily demand for this flavor is normally distributed with a mean of 35 quarts and a standard deviation of 4 quarts. Unsold ice cream is sold each day to a local restaurant at $1.50 per quart. What is the service level and corresponding optimal stocking level?
Answer and Explanation:
The computation of the service level and the corresponding optimal stocking level is shown below:
Given that
Selling price = SP = $4.50
Cost price = CP = $3.00
So,
Salvage value = V = $1.50
Average daily demand (d) = 35 quarts
The standard deviation of daily demand = 4 quarts
based on the above information
Overage cost = (Co) is
= CP - V
= $3.00 - $1.50
= $1.50
Now
Underage cost= (Cu)
= SP - CP
= $4.50 - $3.00
= $1.50
So,
Service level is
= Cu ÷ (Co + Cu)
= 1.50 ÷ (1.50 + 1.50)
= 1.50 ÷ 3.00
= 0.50
= 50%
Now
At 50 % service level, the value of Z is 0
So,
Optimal stocking level is
= d + Z × standard deviation
= 35 + (0 × 4)
= 35 + 0
= 35 quarts
During the year, Next Tec Corp. had the following cash flows: receipt from customers, $15,000; receipt from the bank for long-term borrowing, $6,500; payment to suppliers, $5,900; payment of dividends; $1,700, payment to workers, $2,900; and payment for machinery, $12,500. What amount would be reported for net financing cash flows in the statement of cash flows?
Answer:
$4,800
Explanation:
Next Tech corporation had the following cash flows
Receipt from customers= $15,000
Receipt from bank for long term borrowing= $6,500
Payment to suppliers= $5,900
Payment of dividend= $1,700
Payment to workers= $2,900
Payment for machinery= $12,500
Therefore, the amount that should be reported for the net financing cash flows in the statement of cash flow can be calculated as follows
= Receipt for bank long term borrowing-payment of dividend
= $6,500-$1,700
= $4,800
Hence the amount reported for net financing cash flows in the statement of cash flow is $4,800
Denise contracts with Long Life Insurance Co., agreeing to pay premiums in return for which the company agrees to pay $500,000 to Denise's husband Barn when Denise dies. Barn is a(n):
Answer:
Donee Beneficiary
Explanation:
In the scenario being described, it can be said that Barn is a Donee Beneficiary. This is a third-party beneficiary that occurs when the second party in the contract does not owe anything to the third party but wants to provide them with the benefit of the performance of the first party. Which since in this scenario, Denise wants to provide Barn with all the benefits of the contract even though she does not owe him anything, then it technically makes Barn a Donee Beneficiary to the Long Life Insurance Contract.
2. A constraint which represents a target value for a problem is called a a. fuzzy constraint. b. vague constraint. c. preference constraint d. soft constraint
Answer: soft constraint
Explanation:
The soft constraint is defined as
a constraint on a random variable (X)that permits overruling the constraint.a function from the domains in its scope(set of variables ) into a real number.Hence, a constraint which represents a target value for a problem is called a soft constraint.
Thus the correct option is d. soft constraint.
On January 1, 2018, Lizzy's Lemonade issues 5%, 20-year bonds with a face amount of $81,000 for $71,638, priced to yield 6%. Interest is paid semiannually. What amount of interest expense will be recorded on June 30, 2018, the first interest payment date
Answer:
The amount of $2,149.14 will be recorded on June 30, 2018 , the first interest payment date.
Explanation:
The data below were extracted from the above information
Face amount $81,000
rate 5%
Issue price $71,638
Yield 6%
Since we already know that interest is paid semi annually, then ;
Amount of interest expense will be = issue price × yield
= $71,638 × 6% × 1/2
= $2,149.14
Amount of interest expense is therefore $2,149.14, to be recorded on June 30, 2018, the first interest payment date.
The following data relate to the Denver Company's operations for the year ended December 31, 20XX:
Direct Materials Purchases $100,000
Indirect meterial usage 10,000
Indirect labor 10,000
Direct Labor 300,000
Sales salaries 100,000
Administrative salaries 50,000
Factory water and electricity 20,000
Advertising expenses 60,000
Depreciation-sales and general office 40,000
Depreciation-factory 50,000
Beginning Inventories:
Direct Materials $20,000
Work In Progress 60,000
Finished goods 80,000
Ending Inventories:
Direct Materials $30,000
Work in Progress 50,000
Finished goods 60,000
Required:
Prepare a statement of cost of goods manufactured.
Answer:
Cost of goods manufactured= $490,000
Explanation:
Giving the following information:
Overhead:
Indirect material usage 10,000
Indirect labor 10,000
Factory water and electricity 20,000
Depreciation-factory 50,000
Total overhead= 90,000
To calculate the cost of goods manufactured, we need to use the following formula:
cost of goods manufactured= beginning WIP + direct materials + direct labor + allocated manufacturing overhead - Ending WIP
Direct materials= 100,000 + 20,000 - 30,000= 90,000
cost of goods manufactured= 60,000 + 90,000 + 300,000 + 90,000 - 50,000
cost of goods manufactured= $490,000
Your auto dealer gives you the choice to pay $15,500 cash now, or make three payments: $8,200 now, $4,200 in one year and $3,200 in two years. If your cost of money (discount rate) is 7.25%, what is the PV of the installment plan?
Answer:
The answer is $14,898.07
Explanation:
Assume that the cost of money (discount rate) of 7.25% is on annual basis.
Present value (PV) of the installment plan is:
PV = Down payment + PV(first installment) + PV(second installment)
= $8,200 + $4,200 / (1 + 7.25%) + $3,200 / (1 + 7.25%)^2 = $14,898.07
Obviously, the three payments option is more lucrative than the 100% down payment one.
Suppose an item sells for $125 in the United States and for 62,500 pesos in Chile. According to the law of one price, the nominal exchange rate (pesos/dollar) should be ________.
Answer:
$1 = 500 Pesos
1 Pesos = $0.002
Explanation:
$125 = 62,500 Pesos
$1 = 62,500 / 125
$1 = 500 Pesos
$1 = 500 Pesos
1 Pesos = $1 / 500
1 Pesos = $0.002
Many managers describe performance appraisal as the responsibility that they like least. Why is this so? What could be done to improve the situation?
Answer:
Performance appraisal is by its very nature subjective. To improve the situation, as much as it is possible, objectivity should be allowed to rule all appraisal processes.
Explanation:
Performance appraisal is the formal evaluation of employees by their managers for the purpose of aligning employees' performance to the achievement of corporate objectives. To achieve goal congruence between employees who have different objectives for their work and the organization which wants to achieve profit and other corporate goals, performance appraisals are carried out periodically. However, the process has been marred by manager's bias, incompetence, and other problems.
When the Performance appraisal is by its very nature subjective. then to boost true, the maximum amount because it is feasible, objectivity should have been allowed to rule all appraisal processes.
How to describe Managers Performance?The Performance of appraisal is the formal evaluation of employees by their managers for the aim of aligning employees performance to the achievement of corporate objectives. to realize goal congruence between employees who have different objectives for their work and also the organization which wants to realize profit and also other corporate goals, performance appraisals are allotted periodically. However, the method has been marred by the manager's bias, incompetence, and other problems.
Find out more information about Managers Performance here:
https://brainly.com/question/3431888
Below are the account balances for Cowboy Law Firm at the end of December.
Accounts Balances
Cash $5,000
Salaries expense 2,000
Accounts payable 3,000
Retained earnings 4,000
Utilities expense 1,100
Supplies 13,400
Service revenue 8,900
Common stock 5,600
Required:
Use only the appropriate accounts to prepare an income statement.
Answer:
Cowboy Law Firm
Income statement for the year ended December.
$
Service revenue 8,900
Less Expenses :
Salaries expense (2,000)
Utilities expense (1,100)
Net Income / (Loss) 5,800
Explanation:
Income statements shows Revenues earned and Expenses incurred at the end of the trading period.
The Busby Corporation had a share price at the start of the year of $26.20, paid a dividend of $0.56 at the end of the year, and had a share price of $29.00 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period?
A) 5%
B) 7%
C) 9%
D) 13%
Answer:
D) 13%
Explanation:
Calculation for the percentage that is closest to the rate of return of investments
First step is to find the balance amount of the share price using this formula
Share price =(End of the year Share price + End of the year dividend)-Start of the year Share price
Let plug in the formula
Share price =($29.00+$0.56)-$26.20
Share price =$29.56-$26.20
Share price =$3.36
Second step is to find the rate of return of investments
Using this formula
Rate of return of investments= Share price/Start of the year Share price
Rate of return of investments
Let plug in the formula
Rate of return of investments=$3.36/$26.20
Rate of return of investments=0.13*100
Rate of return of investments=13%
Therefore the percentage that is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this perio will be 13%
The following information pertains to J Company's outstanding stock for 2021:
Common stock, $1 par
Shares outstanding, 1/1/2021 10,000
2 for 1 stock split, 4/1/2021 10,000
Shares issued, 7/1/2021 5,000
Preferred stock, $100 par, 7% cumulative
Shares outstanding, 1/1/2021 4,000
What is the number of shares J should use to calculate 2018 basic earnings per share?
a. 20,000.
b. 22,500.
c. 25,000 .
d. 27,000.
Answer: b. 22,500
Explanation:
J should use the total number of outstanding common stock at end of year to calculate 2018 basic earnings.
As a result of the Stock-split, the shares are split into 2 for 1.
There were 10,000 shares split so;
= 10,000 * 2
= 20,000
On the 1st of July, 5,000 shares were issued. This means that up till December 2021, the stock was outstanding for 6 months.
This will reflected by;
= 5,000 * 6/12
= 2,500 shares
Total shares = 20,000 + 2,500
= 22,500 shares
Three phenomena that tend to bias the expected completion time of projects are inflated time estimates, activity time variability with path interdependencies, and resource dependence.
a. True
b. False
Answer: True
Explanation:
The expected completion time of a project is determined when the duration of every activity that takes place on the critical path is established.
Three phenomena that tend to bias the expected completion time of projects are inflated time estimates, activity time variability with path interdependencies, and resource dependence.
Exercise 11-4 Stock issuance for noncash assets LO P1 Sudoku Company issues 7,000 shares of $7 par value common stock in exchange for land and a building. The land is valued at $45,000 and the building at $85,000. Prepare the journal entry to record issuance of the stock in exchange for the land and building.
Answer and Explanation:
The Journal entry is shown below:-
Land $45,000
Building Dr, 85,000
To Common Stock $49,000 (7,000 shares × $7)
To Paid-in capital in excess of par-Common stock $81,000
(Being issuance of the stock in exchange for the land and building is recorded)
Here we debited the land and building as it increases the assets and we credited the common stock and paid in capital in excess of par-common stock as it also increases the liabilities.
Mauro Products distributes a single product, a woven basket whose selling price is $20 per unit and whose variable expense is $17 per unit. The company’s monthly fixed expense is $8,100. Required: If the company's fixed expenses increase by $600, what would become the new break-even point in dollar sales?
Answer:
the new break-even point in dollar sales is $29,000.
Explanation:
Break even point is the level of activity where a firm makes neither a profit nor a loss.
Break even point (dollar sales) = Fixed Cost ÷ Contribution Margin Ratio
Where, Contribution Margin Ratio = Contribution ÷ Sales
= ($20 - $17) ÷ $20
= 0.30
New Break even point (dollar sales) = ($8,100 + $600) ÷ 0.30
= $29,000
An all-equity firm is considering the following projects:
Project Beta IRR
W .85 8.9%
X .92 10.8
Y 1.09 12.8
Z 1.35 13.3
The T-bill rate is 4 percent, and the expected return on the market is 11 percent.
a. Which projects have a higher expected return than the firm's 11 percent cost of capital?
b. Which projects should be accepted?
c. Which projects would be incorrectly accepted or rejected if the firm's overall cost of capital were used as a hurdle rate?
Answer:
Projects Y and Z
b. Projects W and Z
c. Projects W and Y
Explanation:
CAPM equation : Expected return = Risk free rate + Beta x (Expected market return - Risk free rate)
W = 4% + [0.85 x (11% - 4%)] = 9.95%
X = 4% + (0.92 x 7%) = 10.44%
Y = 4% + (1.09 x 7%) = 11.63%
Z = 4% + (1.35 x 7%) = 13.45%
Projects Y and Z have an expected return greater than 11%
b. Projects W and Z should be accepted because its expected return is higher than the IRR
c. Project W would be incorrectly rejected because the expected rate of return is less than the overall cost of capital (i.e. 9.95 is less than 11). But its expected rate of return is greater than the IRR
Y would be incorrectly accepted because its expected rate of return is greater than the overall cost of capital but its expected rate of return is less than the IRR
A decrease in the basis will __________ a long hedger and __________ a short hedger. Group of answer choices hurt; hurt hurt; benefit benefit; have no effect upon benefit; benefit benefit; hurt
Answer:
hurt, benefit
Explanation:
The basis in a future contract is defined as the difference between the spot price of the asset in the cash market and the price of the same assets future contract.
A short hedge is an investment strategy that is used to protect hedge, against the risk of future decline in asset price or basically to hedge against potential losses by selling at a determined rate. This means that when one is in possession of a commodity and in order to protect against a decline, in the market, you sell (go short) the future contract , while long hedge is when you anticipate a need for the underlying commodity in the future. It means that to protect against an increase in the market price, you buy (go long) the future contract. Then when you are ready to buy the commodity, any increase in the market price is offset by your gain on the future contract.
The above means that where an asset and a contract are liquidated before due dates , there would be basis risk hence both the future and spot price need not move in lockstep before delivery date. This means that a decrease in the basis will benefit the short hedger and hurt the long hedger.
